A balancing act has been saved
A balancing act
Property tax treatment of renewable energy facilities
Renewable energy is a dynamic industry experiencing surging demand as the United States (US) responds to climate change. As states adopt and increase renewable energy portfolio standards and fuel prices continue to rise, so does the interest in renewable energy investments. These projects have the potential to generate significant property tax revenue for counties, cities, towns, and school districts that rely on property tax as a key source of funding.
Assessment of renewable energy facilities
Renewable energy facilities can pose many issues for property tax treatment for both taxpayers and assessing authorities, including:
- Configurations of renewable energy facilities – States differ in the assessment of property based on resource, size, and off-take. Some facilities are small enough in scale to meet the energy needs of a single building or residence while others are utility-scale and similar in generation capacity to large traditional fuel facilities. For larger-scale facilities, off-take strategies may vary depending on the type of power purchaser (e.g., regulated utilities and merchant energy providers). The varying scale and usage of renewable energy facilities can lead to different property tax treatment.
- Assessing authority – The varying scale and usage of renewable energy facilities may also present issues with regard to whether state agencies or local assessors are responsible for valuing the property and administering exemptions. Local assessors may have different insight into the economic conditions within their communities, but state agencies may be able to support resources that have specialized valuation capabilities.
- Classification – Renewable energy facilities may be comprised of both real and personal property. This leads to classification-related questions, such as should renewable energy facilities be classified as real or personal property, and should the facility be valued as an overall economic operating unit or instead by reference to its individual component parts? Stated differently, are these facilities more properly valued based on their investment (cost) or on their earnings capacity (income)?
- Basis for tax – If renewable energy facilities are valued using a cost approach, which capital expenditures should be assessed, and how should federal income tax credits and attributes, such as renewable energy credits and emissions credits, be treated? Some states have eliminated the use of traditional approaches to property tax valuation and, instead, value renewable energy facilities using a flat amount per megawatt (MW).
Incentives and exemptions
Given the scale of capital investment required, certain renewable energy facilities could face substantial property tax assessments, absent incentives and exemptions.
Across the country, states are setting ambitious renewable energy goals and creating economic incentives to help meet them. State legislatures have balanced the interests of their citizenry in incentivizing the development of renewable energy, with the interests of local jurisdictions that may lose out on property tax revenues on account of such incentives. Some states created new, statewide statutory incentives or exemptions specific to renewable energy facilities, while other states created renewable energy incentive or exemption regimes that are at the option of the local jurisdictions. Other states have, instead, added renewable energy facilities into existing economic incentive programs.
California, Texas, and Virginia each have taken a different approach to incentivizing investment in renewable energy. California provides for an exclusion from property tax assessment for qualified active solar energy equipment. The exclusion is not permanent and is only available until there is change in ownership that qualifies as a change in control. The exclusion also sunsets in 2024. Texas provides economic benefits for solar projects through its existing law, referred to as Chapter 312 and 313 incentives. These programs provide for a reduction in property tax if the company commits to a certain capital spend. Virginia classifies certain solar assets as pollution control equipment and provides a stepped-down exemption from property tax based on the size, commercial operation date, and date of the filed interconnection agreement. The state also allows the local jurisdiction to offset this exemption by assessing a charge referred to as a “revenue share assessment,” which is based on the same criteria. These approaches are discussed in more detail below.
Economic and tax policy are closely related and can assist in driving the development of capital projects. Incentives are often temporary inducements to spur development. Many state governments are dealing with incentives being relied upon as a permanent subsidy of the operations of the facility. As the renewable energy industry matures, states may look to modify current incentives by either reducing or eliminating them, while being mindful of evolving federal policies and new technology.
An example of a newly adopted federal policy is The Inflation Reduction Act (“IRA”), P.L. 117-169. The IRA impacts the renewable energy industry by providing for the expansion of production and investment tax credits and applies some retroactively, with phase out provisions. The credits in the IRA can help moderate the impact of inflation on the cost of capital as inflation can cause both the cost of fossil fuels (which relatively can make renewables more affordable) and components of renewable projects to rise – long-term projections about whether one pressure is more dominant than the other will impact the attractiveness of renewable energy investments, with or without state and federal support in the form of credits and other incentives .
An example of new technology is Battery Energy Storage Systems (BESS), which can store energy produced by renewable fuel sources until the power is needed. New technologies, such as BESS, can raise questions for incentives or exemptions that have been designed around production. States vary in whether BESS is defined as a renewable resource and subject to the same treatment as solar or wind or, instead, should be treated as general business machinery and equipment. BESS that are charged with a renewable resource arguably contribute to the displacement of energy produced through fossil fuels, thus helping jurisdictions meet renewable energy goals, but do not produce energy on their own. BESS are also frequently co-located at the sites of renewable energy production facilities, and the property tax treatment can vary based on whether the BESS is installed behind the meter or in front of the meter, what resource is used to charge the BESS, if the BESS can charge from the grid, or for what period. When emerging technologies are not specifically addressed in a jurisdiction’s laws, new rules and regulations or other administrative guidance are needed. Industry groups can help drive clarification. And until there is clarification, the presence of regulatory risk may be higher in some jurisdictions as the practices and policies evolve.
As the industry continues to evolve with the development and expansion of different resources, states are responding by modifying their regulations and practices for incentives and exemptions, updating their definitions for what types of technology are considered renewable, revisiting reporting requirements and their approach to assessing renewable energy facilities. It is important for companies to understand the current property tax rules and regulations for existing, new, and planned projects and to revisit annually for any changes.
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